Employee Stock Ownership Plan (ESOP)
4/26/2004
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An employee stock ownership plan, commonly known as ESOP, could be a stock bonus plan or a stock bonus plan combined with a money purchase plan. It generally is designed to invest primarily in the common stock of the employer.
An ESOP must meet specific requirements with regard to coverage, limitation and nondiscrimination in contributions, non-forfeiture of the rights upon termination of employment, etc.
Used right, it can be a great tool to motivate employees toward increased productivity, secure funds for corporate growth with untaxed dollars, avoid taxes of accumulated earnings (for a C-corporation), and enjoy tax deductions for an employer with little cash out-flow. It can also provide additional income to employees when cashed in as well as pay for key persons' life insurance with pre-tax money.
Unlike a pure stock bonus plan, the ESOP is typically used as a device for implementing the business continuation and estate planning objective of its stockholders. While an ESOP offers similar benefits as that provided by a profit sharing plan, it differs in that it’s distributable in employer stock and contributions do not have to be dependent on the business' profit.
But an ESOP's power is more than that. Like what Jack Stack stated in his bright book, "The Great Game of Business", you can accumulate more wealth by sharing equity than by keeping it all yourself, because "a company of the owners will outperform a company of employees any day of the week."
If you run an enterprise and would like to look into ways of expanding business with leveraged funds, higher performance and stronger sense of responsibility from your employees, or planning for the future exit with better tax savings, ESOP could be a good instrument to engage. Call us to find out more about ESOP.
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